Variable Pay: Ready to Make the Leap?

Answer key questions to determine if a variable pay plan is right for your organization

By John Scorza Jun 29, 2016
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So you want to improve employee performance. But what approach is likely to get results? What will motivate workers to go above and beyond?

Extra cash just might do the trick.

Consider providing your employees with variable pay for performance that goes beyond normal job standards and expectations, advised Karen Vujtech, SHRM-SCP, and Lisa Carlton, SHRM-SCP.

Both spoke on June 21 about “Jumping on the Incentive Bandwagon,” at the Society for Human Resource Management 2016 Annual Conference & Exposition, held in Washington, D.C.

Variable pay is not part of base salary, which is fixed. It’s not guaranteed, and is paid only if performance goals are met.

“Is an incentive plan the solution for every performance problem? We would say, ‘It depends,’ ” said Vujtech, managing director of Total Rewards Consulting in Schaumburg, Ill.

She said the answers to some key questions can help to determine if incorporating variable pay may be right for your organization:

• What strategic business objective would the incentive plan help achieve? Do you want to increase productivity, profitability, customer satisfaction?

• Who would the plan affect? Is it aimed at the entire company, a specific division or department, or particular individuals? Vujtech noted that if an organization has a collaborative culture, it might pay all team members the same size bonus. On the other hand, in a competitive environment, individualized awards may work best.

• What needs to change? What specific improvements—in terms of both behaviors and results—should the plan be designed to affect? And what in particular will you measure?

• Why aren’t the behaviors and/or results currently happening? What might prevent employees from making successful changes? You need to know about and address these issues before putting an incentive plan in place, said Vujtech. Obstacles might include a lack of employee skills or qualifications, training for new systems and equipment, resources, or time, or may indicate employees’ inability to control the results of their work.

• If an incentive is offered, how may employees respond to their new performance goals? Here, it’s important to consider that unintended consequences may arise. Vujtech gave an example of bus drivers whose goal was to closely keep to their route schedules. But to meet that objective, they often left passengers behind at crowded stops rather than allowing them time to board the buses. “Maybe we’re incenting them to do it fast, but without quality,” Vujtech said.

• Are you ready? Have you provided employees with what they need to overcome any difficulties that may arise? That might include training, opportunities to gain experience or manager support.

These questions are a starting point as organizations consider implementing an incentive pay program, stressed Vujtech and Carlton, director of compensation and benefits/HRIS/payroll at Stormont-Vail HealthCare in Topeka, Kan. And they’re likely to lead to even more questions as an organization drills down into the details of how its plan will work.

Workers’ perceptions are important. “You want to be sure that whatever plan you design, your employees feel it’s fair and equitable,” said Vujtech.

And keep this in mind: Although all earned dollars are equal at tax time, when bonuses are issued they're considered supplemental income by the IRS and held to a higher withholding rate, often amounting to nearly 40 percent of the payment. While part of that withholding will typically be refunded, the reduced payout is likely to come as an unwelcome surprise to most workers. That makes it important to think about the size of your bonuses so they still provide a sufficient incentive.

Once an organization decides to implement variable pay, it needs to create a model. The good news is that many of the details of that model have likely been hashed out by considering the strategic questions above. These questions have been designed to cover the basics: Who will participate; what are the business goals; how will you measure results; when will payouts be made? “This is where HR really comes into play,” said Vujtech.

Next steps include developing a plan that contains these details and sticking to it. “It can kin​d of become your bible,” said Vujtech. Then, clearly communicate with workers about the intended goals of the plan, educating them on plan details, the size of their potential bonus, and what they must achieve to earn it.

The plan eventually should pay for itself through increased productivity and profits. “Self-funding is the way to go when it comes to incentive plans,” said Carlton.

John Scorza is associate editor of HR Magazine.

Related SHRM Articles:

Bonus Binge: Variable Pay Outpaces Salary, SHRM Online Compensation, August 2016

Variable Pay Aligns Performance with Rewards, SHRM Online Compensation, June 2016

Private Companies Typically Award an Incentive Pay Mix, SHRM Online Compensation, March 2016

Keep Incentive Pay Plans Simple but Challenging, SHRM Online Compensation, June 2015

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